Explaining the Obama Loan Modification in Simple Terms
By default, most people are optimists. We all like to think that if our government creates a policy in a time of a crisis we can all depend on it to fix the problem at hand. The Obama administration has moved very quickly to address the housing problems that we all face as a nation and I applaud the effort. Many call it the “Obama Loan Modification”. It is unclear, however, if the Obama Loan Modification effort is going to reach as many people as may need it. For some of these people the effort is the last resort before crossing into poverty.
There are many blog posts and news reports out there describing the plan, usually riddled with technical terms and formulas that are hard to follow. In reality the rules of the Obama Loan Modification are fairly simple. You can qualify if:
- Your total monthly housing costs (mortgage, taxes, insurance, Homeowners Association fees etc…) are greater than 31% of your average gross monthly income.
Example of calculation:
Gross Monthly Income: $2000
Combined Housing Costs: $800
Your Percentage: 800/2000*100 = 40%
If your housing costs are over 38% of your monthly income, the mortgage company is partially compensated by the government to reduce that ratio to at least 38% by whatever means available. Such means include increase of the loan term, decrease of the interest rate as well as others. The important thing to remember here is that the lender participation is voluntary.
- You have not originated your loan after January 1, 2009 – Simple enough: they want to make sure you didn’t close your loan after the January 1st deadline. Any date before that is acceptable.
- The property has no more than 4 units. 5-unit or larger properties are excluded from the Obama Loan Modification plan
- You must occupy the property. Rental and investment properties are excluded to ensure the plan helps those who need it most.
- You must be experiencing financial hardship. What this means is that you have to be able to explain the reason you can no longer afford you monthly payments. These reason can range from dramatic increase in monthly expenses to loss or reduction of income.
- Your current loan balance must be under $729,750 as of the 1st day of 2009
The Obama Loan modification plan at the very least has given guidance to an industry that truly needs it. At its best — millions of homeowners will once again be able to afford their houses and our economy will start to bounce back over time with a new confidence in the housing market and our nation.
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Thanks, simple terms are always the best
especially for someone who doesn’t look forward to doing all the paper work and figuring it out
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I was listening to the financial report on the radio today while driving, and I heard them talking about the Obama plans to save the economy. Then they played an interview with Arnold talking about how the Government does not have any money to pay state employees in July. What happened to the USA?
So according to your calculations if you can not afford your almost 730K mortgage (yikes who are these people?), the government won’t help you so you might have to down size. I hope they can make the adjustments.
Thanks for this great information. It is really helpful even if I do not quite fit into the requirements.
Although some people may not agree with the governments actions – at least they are trying to help? The Australian government has not offered a scheme like the one you discussed…I am sure there would be many out there that would appreciate it. The rate of foreclosure is very high here and lots of families are losing their homes. Interesting reading – thanks.
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It’s a step in the right direction. Thanks for the infornmation. This is not easy stuff to understand for most of us so your summary is very helpful
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It would be great if they came out with some additional legislation that can help out folks with rental properties. So far all the mortgage debt relief act and recovery act legislation is only geared toward primary residences. As someone with multiple rental properties that are now worth 100s of thousands less than the mortgage on them, there is nothing out there (not even loan modification programs) that can offer help.
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Great summary of the requirements for the modification. Helpful simplification… But a mortgage of 729k? That’s a lot of house where I come from
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It’s good that you have written this blog to break it all down for people. It can be difficult to understand ‘politician talk’ sometimes!
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Hey Rodney! Actually a house with a mortgage >$729k is not unheard of, at least in DC and other urban areas where 1 bedroom lofts in the renovated area of Logan Circle were priced at $500k just four years ago. I made the unfortunate mistake of qualifying for a loan for an $800k property in 2005. The property (which is beautifully remodeled) is now worth $550k. Yes, basic subtraction means a loss of $250k. Love bites.
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According to the guidelines you have listed here I should qualify, the problem is my mortgage is held by Wachovia and they are not a part of the program. Am I out of luck or is there another way to go?
So who will be buying mortgaged backed securities when the bundles will contain mortgages that are likely to be modified? Nobody, unless they get a higher rate of return. Just one more reason rates are likely to rise.
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